Tuesday, December 28, 2010

Criticism of the U.S. Postal Service's abundance of supervisors, problems with its retirement process, and possible shifts in its workforce were among the items of greatest interest to Dead Tree Edition readers this year.

While we're looking back on the year, allow me to walk you through the highlights and low points for Dead Tree Edition:

January: Dead Tree Editionreports that the regulations governing USPS price caps don't seem to anticipate the sort of deflation that occurred in 2010: "What is not clear is how the rate cap for 2011 will be calculated." Nine months later, the Postal Service realizes the regulations are not clear and asks the Postal Regulatory Commission how to calculate the rate cap for 2011.

March: This blog breaks the news that publicly traded U.S. pulp manufacturers chalked up $6.5 billion in black liquor tax credits during 2009. Various media outlets have subsequently used that number without attribution. Are we really supposed to believe that they dug through the SEC filings of 21 companies to verify that the number was correct? Or is there a new rule of reporting that says you can rely on information from an anonymous blog as long as you don't cite it as the source?

April: We celebrate Earth Day by recommending the use of genuine Amazonian rubber condoms and the firing of Smokey the Bear.

May: The Associated Press distributes an article that for the first time quotes Dead Tree Edition as a source, in this case regarding a quarterly loss for Quad/Graphics. Someone wasn't paying attention to the new rules for citing anonymous blogs. (See March.)

June: Mr. Tree is named #43 on RISI's Power List of movers and shakers in the global paper industry. Still in shock, he reveals how he once confused parasitic wasps with parasitic WASPs.

July: Once again, Mr. Tree is found eating crow, this time after the IRS made "Son of Black Liquor" tax credits possible. He's still trying to figure out how the IRS determined that a "fuel meets the EPA registration requirements if the EPA does not require the fuel to be registered."

August: Print Media Centr's Deborah Corn, the Barbara Walters of the printing industry, publishes an extensive interview with Mr. Tree that delves into rumors that he lives in Hawaii.

September: A publisher offers Mr. Tree some actual money to write a series of articles in 2011. Stay tuned.

November: Popular publishing analyst BoSacks' email newsletter says "my e-friend D. Eadward Tree has some of his usual excellent observations about our industry and the new magazine apps," referring to the article that introduced a new term -- app-oplexy. BoSacks responds to the resulting inquiries by insisting he doesn't know Mr. Tree's real identity. (Psst, don't tell Bo that his wife writes most of this blog's articles during his infamous poker games.)

December: Mr. Tree is so burned out that he goes nine days without publishing an article, then ends the hiatus with a rehash of what he previously published during the year. Hey, this Postmaster General thing is hard work.

Sunday, December 19, 2010

Will the U.S. Postal Service ever learn how to create sensible regulations, or will it continue to find new ways of making the same mistake over and over again?

The latest example of the Postal Service’s regulatory two-step came Friday with the announcement of indefinitely delays to "Full-Service eDoc postage corrections" -- that is, denial of Full-Service Intelligent Mail barcode discounts because of alleged errors -- which were supposed to be implemented on Jan. 2. The ostensible reason was “to give mailers more time to use information from a new report to help correct errors in their electronic documentation,” but there’s more to the story than that.

“The USPS needs more time just as much as, if not more so, than the mailers,” wrote Lisa Bowes, who has reported extensively on Intelligent Mail trials and tribulations at Intelisent’s Postal Affairs Blog. “Making mistakes is a part of learning, but the USPS needs to also learn and try not to repeat its’ mistakes. Setting dates without adequate time to test and implement keeps biting everyone over and over again.”

We’ve seen this dance before, and not just with Intelligent Mail: USPS announces when a new regulation will be implemented, mailers point out flaws with the regulation or the implementation timetable, postal officials forge ahead as planned, and then at the last minute someone at postal headquarters avoids disaster by pulling the plug.

A classic case of poorly considered postal regulations came early last year when USPS announced that the specifications for window envelopes would be changed within a few months, making all currently standard formats illegal. (See It's Curtains for the Window Envelope.) If the bureaucrats who crafted the language had spoken to a few mailers first, they would have realized that their plan would have sent billions of inventoried envelopes and forms to the dumpster.

Fortunately in that case, the proposed regs were taken off the table after only a few days. Unfortunately, the Postal Service has apparently done nothing since then to start the process of getting mailers to switch to window envelopes that work better on letter-sorting machines.

Mailers and their vendors have been saying for months that the Postal Service’s information systems were not ready for it to assess noncompliance penalties for Full-Service Intelligent Mail barcodes (aka FUBAR codes). But in this case, all of the brave "Mission Accomplished" talk from Intelligent Mail executives apparently prevented L’Enfant Plaza from realizing the truth until the eleventh hour.

I’m not saying mailers have to approve or even like every postal regulation. But the Postal Service could anticipate and avoid many problems merely by listening to mailers instead of assuming we’re just a bunch of whiners.

Implementation of the Flats Sequencing System shows how dialog with mailers and mail service providers can help the Postal Service avoid disaster. For example, by discussing its plans for FSS facilities with publication printers a few years ago, postal officials learned that some of the buildings didn’t have enough loading docks or highway access.

The FSS plan originally envisioned all flats being addressed on the top of the back cover, which would have ruined magazines’ most valuable advertising space. The final regulations ended up allowing upside-down addresses at the bottom of the front cover, which met the Postal Service’s needs while causing only minor grumbling among publishers.

Mailers and postal officials have worked together in developing mail-preparation standards that are achievable at the printing plant and should help the FSS facilities operate more efficiently. Declining flat-mail volume and balky machines are big enough challenges for the FSS program, but at least it’s not being hampered by uncooperative customers.

Wednesday, December 15, 2010

If only every Postal Service delay were this beneficial to customers . . .

The maximum 2011 price increase on most types of mail dropped a bit this morning because the U.S. Postal Service did not submit price increases before the Consumer Price Index for November was released.

The price cap on such market-dominant classes as First-Class, Standard, and Periodicals dropped to 1.741%, down from 1.799% if USPS had announced price increases before today. The cap is likely to drop below 1.65% if the Postal Service waits for the December CPI to be released on Jan. 14 before submitting 2011 price increases.

Sunday, December 12, 2010

Postal rates for the majority of mail are likely to rise about 1.8% early next year because the Postal Regulatory Commission has sided mostly with the U.S. Postal Service in a dispute over price caps.

Determining exactly what will happen to First-Class, Standard, and Periodicals rates as a result of the PRC’s complex ruling, issued late Friday, is a bit difficult to discern. But one likely scenario is that the Postal Service will announce average increases this week of 1.8% for these “market-dominant” classes, with implementation as early as February.

The Postal Service would have the latitude to raise the price of a First-Class stamp one cent, to 45 cents (a 2.3% increase), by keeping other First-Class increases lower than the cap.

The PRC ruled that the inflation-based price cap for the next round of price increases would be based on comparing the average Consumer Price Index for the most recent 12 months to that of the previous 12 months. The Affordable Mail Alliance objected to that approach in October (See Mailers Alliance Fights 'Nonsensical' Price-Cap Ruling), saying that it would unfairly ignore a deflationary period in 2009.

The method approved by the PRC would currently yield a price cap of 1.799%, but it is likely to edge down a bit this Wednesday (Dec. 15), when the CPI for last month will be released. If the CPI numbers continue their recent trend, the cap would probably be about 1.65% if USPS waits for the December numbers to raise rates.

The mailers alliance’s proposed method would compare the most recent 12 monthly CPI readings to those of calendar year 2008, resulting in a current price cap of 0.96%.

The ruling was not a total loss for mailers, however. The PRC determined that the deflationary period of early 2009 factors into calculation of USPS’s “unused rate authority”. That’s usually where the Postal Service can “bank”, for future increases, the difference between a rate cap and an actual rate increase. But the ruling cleaned out the bank, resulting in unused rate authority of -0.6% to -0.7% for each market-dominant class.

The rate bank’s negative balances introduce a “use-it-or-lose-it” element to the next rate increase: If any class’s average rate increase is less than the cap, the Postal Service will not be able to bank the difference for future rate increases.

The PRC’s ruling has no apparent impact on the Postal Service’s request for “exigent” rate increases, which is still in front of an appeals court.

Friday, December 10, 2010

Those who are urging Congress to reform the Postal Service's pension and retiree-benefits overpayments would do well to drop the word “give” and instead learn a new one: “invest”.

The suspicion in Congress is that money given to the Postal Service (even if, as in these cases, it's money that rightfully belongs to USPS) would just be poured down a rathole. What Congressman will stick his neck out for something that could be mislabeled a “Postal Service bailout” if he’s afraid of having to explain in a few years why USPS is in trouble again?

Mailers can't really argue with that. We’ve seen how USPS management didn’t really get serious about reducing costs until it was faced with inflation-based priced caps.

But Congress might be able to get behind the idea of investments designed to fix the Postal Service’s financial problems. In other words, much of the pension and benefits money being returned to the Postal Service would be earmarked for solutions rather than just going into general operating funds.

Here are a few of the Postal Service investments that could be attractive to Congress:

Now the Postal Service needs to follow suit by offering retirement counseling (as required by federal regulations) and providing accurate and timely estimates of all pension and annuity benefits. That will require money for new (or transferred) employees and for overhauling information systems.

Incentives To Go Part-Time
The Postal Service also has a sensible goal of relying more on part-timers and temps to handle the peaks and valleys of mail volume, but it hasn't shown much evidence of a plan to reach that goal.

Why not offer bonuses to employees who agree to retire from full-time status and to be hired back as part-timers? That would entice more employees to retire by easing the financial hit they take from leaving the workforce altogether, and it would give the Postal Service an already-trained cadre of folks whose hours can be increased during peak periods. Such a program's popularity with the rank-and-file might ease the postal unions' resistance to workforce flexibility.

Replacing Delivery Vehicles
The Postal Service's delivery fleet is so old that replacing most of the vehicles (many 20-plus years old) would be cheaper than maintaining them, according to the Office of Inspector General. But the Postal Service, which is on track to run out of money in less than a year, keeps delaying the purchase of new vehicles for lack of funds.

A fund to purchase replacement vehicles would ease the Postal Service's operating costs and almost certainly have a favorable return on investment. Many of the new vehicles are likely to be electric, which would appeal to Congressional greens and to those interested in jump-starting the country's electric-vehicle and battery industries. (And maybe some USPS charging stations could be made available to the public.)

New or Revamped Facilities
Delivery vehicles are not the only example of a short-term, cash-flow focus that discourages spending that will pay off over the long run.

The conversion of USPS's Bulk Mail Centers to Network Distribution Centers, which has apparently improved both efficiency and service, shows the potential to reduce costs with capital investments in outmoded facilities. In other cases, the Postal Service could carry out worthwhile facility consolidations if it could expand a building or start from scratch in a new one.

Venture Funds
From selling additional items and services at post offices to using delivery vehicles for reading utility meters, various sources of new revenue for USPS have been proposed. But getting any of those ventures off the ground would require direct spending on equipment, marketing, and perhaps information, as well as the hiring or reassignment of employees.

Sometimes you have to spend money to make money.

Investment in Human Capital
Every discussion with front-line employees about working for the Postal Service seems to touch on the same topics -- abusive supervisors, ineffective managers, too many lazy or incompetent co-workers whose only skill is smooching rear ends, and some employees who are idle most of the time while others are grossly overworked. It sounds like an organization in need of better selection and training of supervisors, as well as the retraining of excess employees to move into slots where they are needed.

This list is by no means complete. I'm sure others will be able to suggest additional Postal Service investments that would have a favorable return on investment.

Tuesday, December 7, 2010

Though they have struggled to bring decentralized Worldcolor operations into the fold, Quad/Graphics executives told Wall Street analysts today they are off to "a fast start" in integrating the two companies.

The bad news of the former Worldcolor's structure is that its "previous acquisitions hadn't been integrated," resulting in "no common manufacturing platform or workflow process," "63 vacation policies" and "94 post-retirement healthcare programs," Quad executives said.

The good news is that Worldcolor had "very little corporate culture to change," they added. That's a huge contrast to Quad, where managers talk of "Quadracizing" almost everything and employees joke about drinking the Kool-Aid.

The executives' comments came during "Investor/Analyst Day" presentations in Wisconsin, which included a tour of the huge printing/mailing facility in Sussex, WI. (Quad posted two presentations on its Web site -- CEO/CFO Overview and Magazine-Catalog Business Overview.)

Quad said "things are progressing as we anticipated" and that projected synergy savings -- annualized $225 million within 24 months -- are "on target."

The printing industry, however, still faces "pricing headwinds due to overcapacity." Quad is putting a dent in that capacity by closing six North American printing plants during the second half of this year -- the "equivalent of closing a large printing company."

Along with shutdown of the former Worldcolor headquarters in Montreal, a 40% headcount reduction in the combined accounting operation, and other "right sizing," Quad is on track to shed nearly 3,000 positions since the July merger.

Some employees displaced from closing (mostly ex-Worldcolor) plants are being transferred to other (mostly legacy Quad) plants. And some customers of the closed plants reported frustrating waits at the peak of a tight paper market while trying to find out where their work was being moved and where their paper shipments should go.

Quad acknowledged that its first post-quarter merger was a bit rough financially, with sales down 2.8% versus what Quad and Worldcolor achieved as separate companies in the 3rd Quarter of 2009. Profitability was also down, with adjusted EBITDA slipping from 15.9% to 14.9%. Once all the post-merger synergies are in place, Quad projects that operating margin will rise to 18.8%, versus 12.6% for rival mega-print R.R. Donnelley.

Tuesday, November 30, 2010

When it comes to iPads and other tablets, the magazine industry seems to be making the same mistake it made with the rise of the Internet and of electronic editions. The erroneous thinking showed up in a recent promotion from the usually forward-thinking Idealliance for a session that was all about “delivering magazine editions to multiple digital devices in addition to print.”

Yep, magazine-industry executives seem to be looking at the iPad and saying, once again, “Cool technology. How can we put our magazine onto that?”

A more sensible question would be, “How can our brand be translated to this new medium?” or, more crassly, “Can we make money with this thing?”

The result of asking the wrong question is that magazine-industry apps are, for the most part, boring.

“Having spent much of the past week downloading (or sometimes struggling to download) book and magazine apps in the search for design gems, I've come to the glum conclusion that most were designed with little or no imagination,” Alice Rawsthorn of The New York Times wrote yesterday. “All the designers seem to have done is to have shunted the original printed products on to the screen.”

But there are at least two signs of hope that the industry can learn to translate its brands onto tablets: Cosmopolitan mined its extensive investigative reporting on the Kama Sutra to create its Sex Position of the Day app, and Guitar World showed how to do a logical brand extension with its new (and well received) Lick of the Day app.

(Mr. Tree wants to know why none of the women he dates are Cosmo readers. Answer: He needs to spend less time hanging around in bookstores and more time hanging around on street corners.)

For those of you wondering about the difference between the Cosmo and Guitar World apps, only the latter will show you how to use an instant flanger.

Well, come to think of it, maybe those naughty Cosmo editors have found a creative use for instant flangers as well.

Sunday, November 28, 2010

High costs that outweigh any postage discounts and poorly trained Postal Service employees are keeping most business mailers from using Full Service Intelligent Mail barcodes, an extensive study concludes.

Of the 290 business mailers surveyed by USPS’s Office of Inspector General, 58% said they did not use Full Service IMbs because of high start-up costs and software requirements. Only 23% of the surveyed mailers said they were using Full Service.

“The man hours that go into making a mailing Full Service compatible are not worth the postage discount,” said one large mail owner (more than 1 million pieces annually). Another estimated it would have to spend more than $100,000 on new print heads and software upgrades to be able to create Full Service mailings.

The OIG report, released a few days ago, recommended that the Postal Service consider new Full Service incentives “to offset program start-up costs.”

But money is not the only issue, and perhaps not even the biggest one, the report indicated. Mailers will find their mailing vendors – “mail service providers” in postalspeak – reluctant to handle full-service mailings because the Postal Service’s employees and information systems are so poorly prepared to handle them.

The OIG recommended that USPS provide more training to Business Mail Entry (BMEU) clerks and PostalOne! help desk employees. Management largely shrugged off that recommendation, but the OIG considers the issue so significant that it won’t consider the matter closed until it receives written confirmation that corrective action has been taken.

Full Service Intelligent Mail barcodes uniquely identify each mailpiece. IM barcodes are part of the Postal Service’s plan to track and manage mail volumes in an automated way, but Dead Tree Edition has nicknamed them “FUBAR codes” because of the program’s many problems.

The OIG report includes some instructive comments from mail service providers, including these:

“USPS employees know little or nothing about this service and this is frustrating mailers with the IMB Full Service.”

“Provide better BMEU training during initial mailings so the clerks and their managers know & understand the process (better than I do - I shouldn't be teaching them).”

“The PostalOne! help desk most of the time does not have a clue they don’t respond to e-mails all the time and the wait time on the phone is too long.”

“To make matters worse, even the USPS personnel (in Memphis) are confused as I've had to correct and educate them.”

Tuesday, November 23, 2010

On the way to creating its new color product that is supposed to make e-readers “Just Like Paper, Only Better,” E Ink forgot a few basic things. Like elementary school physics. And the color yellow.

As a result, the new Triton Imaging Film has a limited range of colors and a washed-out look that falls far short of four-color printing.

“The color is extremely desaturated even in their carefully presented marketing materials,” writes printing and color expert Gordon Pritchard. “The display's lack of color saturation may actually reveal the cause of the problem.” A friend of Dead Tree Edition who saw a prototype device confirms that the color is underwhelming.

Because they use reflected light (just like paper) rather than emitted light (like computer screens), E Ink’s products seem to be easy on the eyes and on battery life. That has made them a component of such popular products as the Kindle DX and the Barnes & Noble NOOK.

Here’s the design flaw: Triton uses the red-green-blue (RGB) color scheme that works for computer screens and other emitted-light devices but is ill suited to a reflected-light device.

If you remember your elementary school physics, red light, green light, and blue light can be combined to create just about any color. That works fine if you control the light sources.

But if you use reflected light, you need to filter those primary colors to create the desired hues. That’s why four-color printing relies on cyan (which filters out red light but allows green and blue to be reflected back to the eye), magenta (which blocks out green), and yellow (which filters out blue) – plus black.

“There is no RGB combination of ink hues that will deliver a yellow hue – and yellow is noticeably absent from the images so far shown for this display technology,” Pritchard adds.

If Triton mimicked the CMY (cyan-magenta-yellow) color scheme used by printers, he adds, it would have achieved similar results “in terms of color gamut and saturation. The color intensity would change according to the ambient light and be dependent on the ‘blackness’ and ‘whiteness’ of the underlying black and white screen pigments.”

Sunday, November 21, 2010

After starting up just seven Flats Sequencing System machines in the past six months, the U.S. Postal Service says it will have another 10 handling live mail by the end of this month.

USPS has greatly accelerated the pace of machine installations now that it has nailed down where the 100 machines in FSS Phase I will go and what ZIP codes they will handle. Besides the 18 that were already processing mail and the 10 being added this month, another 46 of the football field-sized monsters have been installed, according to a revised deployment schedule USPS released recently.

The Postal Service says it is still on pace to have all 100 machines up and running by June of next year. The latest plan is for those machines to sort catalogs, magazines, and other flat mail for 2,328 ZIP codes in 47 locations.

As noted in Is The FSS A Boondoggle?, the jury is still out on whether the $1.4 billion Phase I investment will be worthwhile and whether FSS will truly revolutionize the handling of flats mail. But the machines do seem to be reducing letter carriers’ in-office time, resulting in fewer carriers needed for areas served by FSS. And some of the machines have had idle days for lack of flat mail to process.

One aspect of FSS not likely to succeed is a recently implemented program that lets mailers package flat mail the way they will eventually be required to do for FSS zones. Following the optional preparation standards would result in more copies per bundle and in pallets configured optimally for the FSS machines, enabling USPS to test its theories about the best way to create bundles and pallets of mail for the machines.

But using the optional standards means loss of carrier-route discounts, which would be a significant penalty for most mailers. So it’s hard to see why they would go through the hassle and cost to participate in the experiment.

Monday, November 15, 2010

In taking the editorial reins at Newsweek, (AKA Beastweek), Tina Brown is treading ground already familiar to her husband: running a troubled newsweekly. But her publication is going in a decidedly different direction.

Sir Harold Evans was editorial director of U.S. News & World Report from 1997 to 2000, back when it was a weekly magazine battling against larger competitors Time and Newsweek. It subsequently went biweekly, then monthly, then announced this month it is shutting down its magazine altogether to focus on its more successful Web business and specialty print products.

Under Lady Evans -- er, Ms. Brown -- Newsweek's Internet content will soon be incorporated into the site of its new sibling, The Daily Beast.

So for those who used to see Jesus on the cover of both magazines around Easter time and wonder about the difference between the two, here's your answer: Newsweek is a magazine without a Web site, while U.S. News is a Web site without a magazine.

By government standards, the U.S. Postal Service's top executives, with their multimillion-dollar pension packages, are doing quite well. But their compensation is lagging further behind their counterparts in private industry, according to a USPS consultant.

"Towers Watson [a major management consulting firm] found that USPS executive base salaries are significantly below market when compared against published survey data of comparable jobs in the private sector," says the Postal Service's annual financial report, released today. "Moreover, the most recent assessment using 2010 data indicates that USPS executive salaries have continued to erode further over the past twelve months."

The same report says that Postmaster General Jack Potter, who is about to retire, ended fiscal year 2010 with pension benefits worth $4.4 million and received $798,418 in total compensation for the year. His successor, Deputy PMG Pat Donahoe, has pension benefits exceeding $3 million and received $481,088 in total compensation last year.

Two other postal executives also have pension packages worth more than $1 million. Because annual pay per person is capped at $276,840 annually, the Postal Service uses a variety of perks (such as spousal travel and employer-paid life insurance) and deferred incentive compensation to attract and retain top postal executives.

The annual report seems to lay to rest any ideas that Potter, who is only 55, is being forced to retire by the Postal Service's Board of Governors:

"Due to Mr. Potter's extraordinary leadership during the difficult and unprecedented economic challenges of 2010 and the results he achieved in implementing a number of process improvements that maintained service while lowering costs, his significant staff reductions, his development of a comprehensive plan to guide the Postal Service for the next decade, and his achievement of personal goals set by the Governors for the fiscal year, the Governors determined that it was appropriate to award the incentive compensation he is entitled to receive according to his contract."

Saturday, November 13, 2010

You can automate all your processes and follow every industry standard known to God and man, but that won't make your printed product immune to human error. Just ask the staff of Entertainment Weekly.

Print industry blogger Deborah Corn questioned recently whether the production team at the Time Inc. magazine was “asleep at the wheel” because of upside-down pages in a subscriber copy she recently received.

Here’s her description: "I received my EW (with Captain America on the cover) and saw that the back cover, an ad for an upcoming TV show on TBS, was upside down. My automated address was also upside down on the right side up cover. I looked carefully to see if perhaps it was some gimmick – like “this show will change your perspective” or if there was some reference to why it was placed this way – but there is none. I flipped over the mag, and saw that the back inside cover was also upside down, as were the last 2 text pages, also ads for this show."

As a Time Inc. publication, EW no doubt did everything in a sophisticated, leading-edge way. SWOP-compliant, PDFx/1a page files? Check. Ad file preflighted by Time and virtual-proofed at the printing plant? Check. Instructions to the printer generated automatically in a computer-readable format (instead of the usual spreadsheets and emails)? Check.

So what happened? It sounds to me as if this went wrong at the imposition stage – what PrintWiki defines as "the positioning of pages on a press sheet in such a manner that when the sheet is folded into a signature and cut, the pages will be in the correct sequence." In the U.S. magazine industry, imposition is almost always done by the printer, not the publisher.

How did it happen on both two cover pages and two body pages? This was probably a single eight-page signature. Saddle-stitched magazines often run mixed-stock cover signatures, where one web of the press prints four pages on cover stock that are assembled with four pages of lighter body stock from the other web.

And what about the upside-down address? That was no accident; it’s almost universal for mailed magazines in the U.S. these days. Postal regulations require flat mailpieces to have a right-side-up address in the upper right-hand corner when the bound edge is on the left. The back cover (where catalogs put the address) is prime advertising space, so most magazines meet the requirement by putting the address upside-down near the bottom of the front cover.

Why haven't more people reported seeing this? The big weeklies usually print in several different locations to meet tight newsstand delivery schedules, so this error only affected part of the country.

And I'm guessing not many copies had been produced before someone at the printing plant in question said, "Holy s#*t! Stop the cover press and fix these pages pronto!" But there might not have been time to redo all of the defective magazines.

And how did this mistake happen in the first place? An actual human apparently found a way to goof up an almost comply automated process. So much for the dream of a "lights-out" pressroom (although the error does make me wonder if the lights really were out).

Reminds me of the famous Warren Bennis prediction: "The factory of the future will have only two employees, a man and a dog. The man will be there to feed the dog. The dog will be there to keep the man from touching the equipment."

The key language in the PRC's ratemaking rules states, "no rate shall take effect until 45 days after the Postal Service files a notice of rate adjustment specifying that rate." The period could be longer if someone challenges the proposed rates as being out of compliance with the price cap.

Some have also contacted me questioning how quickly the Postal Service's information systems could be updated with the new rates, given the recurring problems with PostalOne and other USPS systems. Good question.

Thursday, November 11, 2010

Because the Postal Service is seeking a ruling on how to calculate its rate cap, mailers will probably have to wait a few weeks before learning what rate increases are in store for next year.

USPS asked the Postal Regulatory Commission yesterday to determine “the amount of unused rate adjustment authority when rate adjustments are more than 12 months apart.” The issue is especially murky because the PRC’s rules for determining the inflation-based price cap on most postal rates (including First Class, Standard, and Periodicals) did not anticipate periods of deflation, as occurred in late 2008.

“If amendment to the Commission’s rules is necessary to give effect to the Commission’s determination, then the Postal Service asks that the Commission take such action,” the USPS petition said.

Assuming the Postal Service will await the PRC’s decision before issuing new rates for the “market-dominant” classes, the petition probably puts off any rate announcement for a couple of weeks – or longer if the PRC decides to hold a hearing or to entertain legal briefs. A rule change would probably require even more time.

The PRC has indicated it is sympathetic to the Postal Service’s financial plight, so it might expedite the decision. But it is also trying to complete an advisory ruling this month on the complex and contentious five-day delivery issue.

Informal guidance last month from the PRC’s chief lawyer said the rate cap could be calculated by comparing the recent monthly Consumer Price Indices to those from 2008 because most postal rates have not changed since then. But the Affordable Mail Alliance objected on both procedural grounds and also because that would unfairly ignore the fact that the average CPI in 2009 was lower than in 2008.

Rate increases that are within the CPI-based rate cap can be implemented in as little as 45 days (See the Nov. 12 update explaining the change from this article's original language), but USPS has usually given at least 90 days so that providers of presort software can rejigger their programs.

Tuesday, November 9, 2010

That's one of the differences between publishing companies and school systems that Cathie Black of Hearst Magazine will need to keep in mind as she makes the transition, announced today, from a career running newspaper and magazine companies to becoming chancellor of New York City Schools.

Here are eight more subtle distinctions between a publisher and a public school systems she'll need to keep in mind:

School systems are not-for-profit agencies by design. Newspapers are no-profit organizations despite all their efforts to be otherwise.

For schools, the largest inflow of funds is from state and local governments that always seem to be screwing them out of some money. For magazine publishers, the largest outflow of money is for postage, which also involves an indifferent bureaucracy that always seems to be screwing them out of money.

For a school system, a new student means more state and federal aid. For a publisher, a new subscriber means less net revenue (because the subscription agent charges more than the subscriber pays).

Schools have math classes that make kids feel like idiots as soon as they open a textbook and try to understand algebra. Magazine publishers have blow-in cards that make newsstand customers feel like idiots as soon as they open a copy and see they could have saved 90% by buying a subscription.

Public schools offer free education to all. Publishers charge some customers for their content, then give it away to others on their Web sites.

Schools are often judged by meaningless metrics, such as how their sports teams do and what proportion of the students take SATs. Publications have their own meaningless metrics, like awards and newsstand sales.

Schools are run by principals. Publications are run by advertising salesmen, who have no principles.

Sunday, November 7, 2010

Contrary to their popular image as despoilers of the forest, major paper companies get high marks for being green in a recent ranking of large U.S. companies.

All six forest-products companies in Newsweek's "Green Rankings 2010" scored in the top 35%. The magazine ranked the nation's 500 largest publicly traded companies on their environmental impact, "green policies", and reputation.

Leading the way was Kleenex maker Kimberly-Clark, ranked #76 based on a score of 80.65 out of a possible 100 despite a poor showing in the environmental impact category.

Greenpeace ended its Klearcut campaign against the company last year when it agreed to increase its usage of certified and recycled pulp. Kimberly Clark calls itself a consumer-products company, but with its purchase and processing of more than 3 million tons of pulp annually, it certainly fits into the forest-products industry.

IP made the biggest upward move from last year's inaugural ranking, jumping from #344, while Kimberly-Clark improved from #120. Domtar wasn't in last year's survey (probably because it was then classified as Canadian), while the other three slipped slightly in the rankings.

Other articles that challenge common conceptions about forestry and the forest-products industry include:

Thursday, November 4, 2010

Democratic Congress members who received significant financial backing from the forest products industry fared poorly in Tuesday’s elections, according to a published analysis.

The industry’s favorite candidate, Sen. Blanche Lincoln, D-AR, lost her re-election bid, as did three of the other eight Democrats who had received at least $20,000 in contributions from the industry as of Oct. 15, according to U.S. News & World Report. Another top recipient, Sen. Patty Murray, D-WA ($40,682), is clinging to a slim lead with votes still being counted.

The industry’s $1.89 million in donations slightly favored Democratic incumbents, with contributions averaging $5,611 per Democrat versus $5,394 for Republicans, according to U.S. News’ Congress Tracker web site, which is based on reports filed with the Federal Elections Commission. The site does not report on contributions to non-incumbents.

Lincoln’s haul of $149,750 from the industry was nearly three times greater than that of any other candidate, according to Congress Tracker, but her Republican challenger nevertheless trounced her. Other favorites of the forest-products industry who lost were Rep. Walt Minnick (D-ID, $38,350), Rep. Norman Dicks (D-WA, $24,717) and Rep. Travis Childers (D-MS, $20,000).

Not surprisingly, all of the Republican incumbents who received significant backing from the industry won re-election. Sen. Lisa Murkowski ($25,200), a former Republican waging an independent write-in campaign, seems likely to win, though that race has not been decided.

U.S. News notes that its data is based on “a compilation of contributions from the organization’s PACs . . ., employees, or immediate family members of employees” because the companies themselves generally don't contribute directly to campaigns. Of the industry’s top 25 recipients, five were from Washington, three from Oregon, and two each from Arkansas, Idaho, Mississippi, and Alabama – all of which have a significant industry presence.

The forest-products industry – which includes companies involved in timber, paper, pulp, and packaging – was not even among the top-50 industries donating to incumbents’ Congressional campaigns, according to Congress Tracker.

Wednesday, November 3, 2010

To understand how Congressional leaders exert influence over the supposedly independent U.S. Postal Service, consider the agency’s mail-processing centers in West Virginia.

As long as the late Sen. Robert C. Byrd, sometimes known as the Prince of Pork, ruled the Senate Finance Committee, the 11 mail-processing centers in his home state were safe. Though West Virginia had more such centers per capita than nearly any other state, the Postal Service’s efforts to consolidate its processing network somehow bypassed the Mountain State.

But all that has changed in the past five months, during which the Postal Service’s AMPS (Area Mail Processing Studies) program has hit the Mountain State with full force.

With Byrd on his deathbed, the Postal Service announced AMPS in June to consider shifting work from the Huntington and Beckley facilities to Charleston, WV. Just four days after Byrd died on June 28, USPS moved the processing of mail originating in ZIP codes beginning with 260 from Wheeling to Pittsburgh.

And last month, USPS announced another possible out-of-state shift – of mail processing from the Martinsburg Customer Service Mail Processing Center to the Suburban Maryland Processing and Distribution Center near Washington, DC.

Most, but not all, AMPS result in some form of consolidation – and, for some employees, a transfer on relatively short notice to another processing facility 100 or more miles away. The good news for Huntington workers is that Charleston is “only” 54 miles away; the bad news is that such proximity makes Huntington ripe for consolidation.

Because West Virginia’s mail is divided up among so many “Byrd droppings” – mail-processing facilities that each serve an unusually small number of customers -- mailers rarely dropship into the state. (USPS: Clean Up the Byrd Droppings! explores this in more depth.)

Consolidating more of the state’s handling of destinating mail into the Charleston P&DC could make it a more viable dropship location. That would save mailers and the Postal Service money and bring Charleston some work now performed by such out-of-state network distribution centers as Pittsburgh and Cincinnati.

USPS: Clean Up the Byrd Droppings! Many states with far more people and land area than West Virginia nevertheless have fewer mail-processing facilities. West Virginia's excess hurts both USPS and its customers.

Tuesday, November 2, 2010

Much to their amazement, U.S. pulp manufacturers are discovering that the Son of Black Liquor tax loophole is starting to pay off or will soon do so.

International Paper reversed its previous statements on the subject a few days ago, acknowledging that its gains could be "substantial" from the Cellulosic Biofuel Producer Credits program (commonly called Son of Black Liquor in conjunction with the pulp and paper industry). The country's largest pulp manufacturer scoffed early this year at the possibility of receiving any money from CBPC and said in July it did not foresee much benefit.

IP's most recent assessment was underscored by some of the first reports of 3rd Quarter earnings by smaller pulp makers. Temple-Inland, with less than one-fourth of IP’s pulp-making capacity, reported net gains of $83 million from Son of Black Liquor. Buckeye Technologies, with less than one-tenth of IP’s capacity, booked $51.3 million in after-tax profit from the program.

Those companies recorded Son of Black Liquor earnings and others are estimating 4th Quarter earnings because recent Internal Revenue Service guidance clarified how pulp makers can pay back Alternative Fuel Mixture (AFM) subsidies, the original black liquor tax credits, to cash in on the more lucrative Son of Black Liquor tax credits.

Both programs were established to encourage production of environmentally friendly fuels. But in the case of pulp mills, neither has what environmentalists call "additionality" -- that is, they had no favorable impact on the environment.

The federal government doled out, and is still doling out, billions of dollars to pulp and paper companies for doing in 2009 what they would have done anyway -- following the standard industry practice of burning black liquor, a pulp byproduct, to power their mills.

When CBPC started last year, pulp manufacturers did not bother to register for the program because the regulations indicated it was only for motor fuels and motor fuel additives. Even after the IRS issued a controversial ruling that made black liquor eligible for the program, industry analysts predicted that Congress would soon close the loophole.

But Congress went on its pre-election recess without taking up the issue or receiving a requested study of the loophole's impact. Meanwhile, pulp mills seem to be having no trouble getting IRS approval to participate in CBPC.

IP plans to carry forward at least some of Son of Black Liquor credits into future years, according to the company's CFO, Timothy Nicholls.

“If we see that there's a benefit there that we can realize, we'll try to time it, such that anything that we're giving back is timed close to when we would file an amended return and get the benefit from the cellulosic biofuel credit,” he said during the company’s recently quarterly earnings conference call.

“We're currently assessing where we are,” Nicholls said. "We can't quantify the potential benefit of the cellulosic tax credits at this time, but we think that, potentially, it could be significant.”

Temple-Inland didn’t have to repay any of its AFM credits to get the $83 million tax gain. It claimed Son of Black Liquor credits only on production from the 1st Quarter of 2009 when it was not participating in the AFM program. It has not indicated whether it would pay back any AFM money to receive additional Son of Black Liquor credits.

Sunday, October 31, 2010

Here's some bad news for both the U.S. Postal Service and postal employees who are eyeing retirement: The federal agency that has caused months of delays in processing retirement applications and issuing benefits checks isn't going to clean up its act any time soon.

The Office of Personnel Management's Retirement and Benefits Office "characterized by lengthy delays in processing claims, might not get much better any time soon," writes Tammy Flanagan of the National Institute of Transition Planning, in a recentGovernment Executive article. The agency has hired additional employees to work on the backload of claims and eventually hopes to modernize its paper-based processing system.

OPM officials acknowledge that the agency "still processes retirement claims in 2010 much the same way it did in 1920," Flanagan writes.

Downsizing the workforce through attrition, mostly retirements, is a major part of the Postal Service's plan to fix its finances. But the cumbersome process of getting accurate benefits estimates and timely payments deters retirement-eligible employees from calling it quits.

Postal Service retirees report that OPM was overwhelmed by USPS's early-retirement programs last year, with some waiting six months or longer to receive their first payments. (If a private business did that to its retirees, someone would probably end up in jail.)

Such waits have been common since at least the 1980s, Flanagan indicates. Her advice: Employees should save up annual leave in the year they retire so that they will get a lump-sum payment upon quitting that will see them through until the retirement checks start coming.

The filing in "United States Postal Service v. Postal Regulatory Commission" does not reveal any of the Postal Service's arguments in the case. It merely states, "The United States Postal Service hereby petitions this Court for review of Order Number 547 of the Postal Regulatory Commission (PRC), issued on September 30, 2010, which denied the Postal Service's request for exigent rate adjustments."

Yesterday, the U.S. District Court of Appeals for the District of Columbia set deadlines of Nov. 29 for procedural motions and Dec. 13 for dispositive motions (that is, motions for the court to issue a summary judgment or to dismiss the case).

Monday, October 25, 2010

At the ripe age of 55, Postmaster General Jack Potter announced his retirement today from the worst CEO job in America.

Some will no doubt speculate about the reasons -- a coming change in Congress or perhaps the failure so far to notch any major political victories on such issues as rate increases, five-day delivery or retiree-benefits reform. But I have my own theory.

The job stinks.

By any measure, the U.S. Postal Service is among the top five employers in the country. Chiefs of any similar-sized private organization get at least 10 times as much compensation -- and far fewer complaints about how much they're being paid.

I've had my criticisms of Potter's Postal Service, but most of what's wrong seems to predate Potter. And change doesn't come easily to such a massively bureaucratic and complex organization. Laws, regulations, political forces, union contracts, and the inability to hire talented managers from outside the organization all tie the PMG's hands in a way that no private-sector CEO has to deal with.

Most CEOs have a board of directors consisting of fellow or former CEOs, investment bankers, high-powered lawyers, and others who can provide valuable guidance. But the Postal Service's board of governors is made up mostly of political hacks with little relevant knowledge or experience.

And then there's the Postal Service's other governing body, consisting of 535 politicians who drain billions from the USPS in pension and benefits funds to hide the size of the federal deficit, carp about how much money the Postal Service is losing, then scream "not in my district" whenever attempted Postal Service streamlining hits too close to home.

Want to launch a new venture? If you're the PMG, forget about the usual discussions of return on investment or marketing plans. First you have to figure out who might object and whether they have the political clout to block the path.

A money-losing business with an acknowledged need to downsize moves quickly, with many people working round the clock to implement buyout packages and to consolidate operations. But the Postal Service's downsizing efforts creak along, with each facility consolidation the subject of many months of study, public hearings, protests, and Congressional badgering.

And instead of encouraging people to retire to reduce operating expenses, the bureaucracy discourages them instead by offering incomplete, sometimes inaccurate, benefits information and notoriously slow payments.

To no one's surprise, Potter is being replaced by his right-hand man, Pat Donahoe, the deputy PMG and chief operating officer. My condolences, Pat.

Friday, October 22, 2010

The U.S. Postal Service’s decision, announced today, to appeal the Postal Regulatory Commission's exigency-rate ruling could backfire, and yet in a way the Postal Service can’t lose.

The appeal could backfire if the appeals court decides that hardship to USPS caused by an economic recession is not grounds for breaching the inflation-based price cap on most postal rates. The PRC said the recent recession did in fact justify emergency rate increases but that postal officials failed to tie their request to the recession.

Regardless of what happens in the Court of Appeals for the District of Columbia, the appeal is likely to be a winner in the court that really matters for the Postal Service – Congress. Win, lose, or draw, there’s not enough money at stake in the exigency case (“only” $2.3 billion) to fix the Postal Service’s finances.

The only potential solutions big enough to stanch the bleeding seem to be reforming retirement-benefits payments that shift money from USPS to the federal government, reducing days of delivery, or some kind of radical downsizing. Congress is the key, or rather the roadblock, to all of those.

To get Congress to remove any of those roadblocks, postal executives need to show Congress that they have done everything possible within current law to balance the books. They can’t afford to be second-guessed regarding why they didn’t appeal the PRC’s Sept. 30 ruling, even if the court’s ruling closes a door (a revised exigency rate request) that the PRC left open.

The Postal Service's announcement did not provide much detail regarding the basis for its appeal, other than that it "disagrees with the PRC’s interpretation of the statutory language and believes that the PRC applied an incorrect standard in evaluating the request for anexigent price increase."

It added, "The Postal Service believes we need clarity regarding the exigent price increase rules under current law should the Postal Service find itself in a similar situation in the future."

The appeal will have no impact on USPS’s ability to seek an inflation-based increase, which could happen any day.

Tuesday, October 19, 2010

More than $1 billion in federal money probably flowed to key backers of the Tea Party because the Democratic-controlled Congress failed to shut off black liquor tax credits.

The money was paid last year to paper giant Georgia Pacific, which is part of the Koch Industries conglomerate that has been the center of much political controversy and media coverage of late.

The coverage and often-heated discussions – including an environmental group's anti-Koch spot that debuted on a Times Square superscreen last week -- have overlooked the ironies of GP’s black liquor windfall.

Democratic Congressional leaders complained in March 2009 when they learned that pulp manufacturers like GP were exploiting a loophole in a federal biofuel program. But they failed to close the loophole, enabling the companies to rake in billions of dollars in direct subsidies from the IRS for basically doing what they and pulp makers around the world have been doing for decades – burning black liquor, a pulp byproduct, to power their mills.

Environmental groups have attacked Koch’s owners and executives for being, in the words of Greenpeace, “a financial kingpin of climate science denial and clean energy opposition.” Liberals, including Obama himself, also point to the generous support of Koch’s owners and executives for Tea Party organizations and conservative political candidates.

And conservatives are crying foul over the Obama Administration’s alleged persecution of Koch. Six Republican senators recently requested an investigation of whether the Internal Revenue Service leaked confidential tax information about the company to an Obama advisor as part of a campaign to harass conservative political donors.

Now for the ironies:

Irony #1, Alternative fuel mixture (AFM) tax credits: This federal program was supposed to subsidize new eco-friendly fuels, but manufacturers of kraft pulp spotted a loophole that enabled them to get the credits for using black liquor as a fuel, which they were doing anyway. A United Steelworkers publication claims GP, the country’s #2 maker of kraft pulp, raked in $5 billion in black liquor tax credits. But, based on the company’s pulp-making capacity, the number was more likely in the $1 billion to $1.5 billion range.

In any case, a program that was intended to subsidize green alternatives to petroleum-based fuels paid out huge sums to a conglomerate that is mostly an oil and chemicals company and that generously funds attacks on renewable-energy programs and claims of human-caused climate change.

Irony#2, ObamaCare: Why, after fuming about the black liquor loophole in the spring of 2009, did Congress and the Obama Administration not try to close it? The best theory is that they did a deal with Sen. Olympia Snowe, R-Maine and a champion of the pulp and paper industry, so that they would have at least one GOP yes vote in the Senate Finance Committee for the Administration’s sweeping healthcare legislation.

Democrats' use of black liquor money to grease the skids for healthcare legislation could backfire: Americans for Prosperity, a Tea Party-affiliated group that was started and largely funded by Koch's owners, has spun off an organization called Hands Off My Healthcare, which is campaigning against pro-ObamaCare Congress members who are seeking re-election.

Irony #3, Internal Revenue Service: The IRS came under suspicion when a senior Administration official told reporters in August, "So in this country we have partnerships, we have S corps, we have LLCs, we have a series of entities that do not pay corporate income tax. Some of which are really giant firms, you know, Koch Industries is a multibillion dollar business."

The Republican senators seeking an investigation of a possible IRS leak responded, "The statement that Koch is a pass-through entity implies direct knowledge of Koch's legal and tax status, which would appear to be a violation." Koch Industries has issued a statement saying that it’s a corporation and pays corporate taxes.

The suspicion of the IRS is a strange turn of events considering how helpful, perhaps unwittingly, the agency has been to Koch’s Georgia Pacific.

IRS rulings on black liquor have been favorable to all kraft-pulp manufacturers, enabling them to claim alternative fuel-mixture credits even on the portion of black liquor that has no energy value, such as water. The result was about $6.6 billion paid out to publicly traded pulp makers, plus probably at least $2 billion more to privately held companies like GP.

But the agency’s strangest ruling on the tar-like pulp byproduct appears to be of special benefit to GP. The “Son of Black Liquor” ruling made black liquor eligible for another green-energy program, Cellulosic Biofuel Producer Credits (CBPC), despite a law saying that only EPA-approved motor fuels were eligible.

These tax credits are twice as generous as the original black liquor credits, but they can only be used to offset income taxes, making them virtually worthless to the many unprofitable and marginally profitable pulp and paper companies. The country’s #1 pulp maker, International Paper, has said it isn’t sure whether it will have enough tax liability to justify paying back any of its $2.1 billion in AFMs to get the new tax credits.

Not so with Koch. With an estimated $100 billion in annual revenue, much of it from its presumably profitable oil sector, the big conglomerate should have no problem making immediate use of the approximately $2 to $3 billion in tax credits it would receive if it returned all of its original black liquor subsidies.

Dead Tree Edition has published more than 40 articles on the strange saga of black liquor tax credits. Here are a few that provide more background on these eco-credits that did nothing for the environment (including links to original documents so that you know I’m not making this stuff up):

U.S. Taxpayers' Black Liquor Tab Surpasses $30 Billion: For the next several years, taxpayers will be footing the huge bill for Congressional shenanigans regarding pulp byproducts, with most of the money going to hide increases in the federal deficit rather than to pulp manufacturers.

And here’s more background on Koch Industries, the billionaire brothers who own most of it, and their political activity:

Meet Koch Industries: The green group that produced the Times Square provides chapter and verse on environmentalists’ and liberals’ complaints about Koch and the Koch brothers.

Shutting Up Business: A lengthy Wall Street Journal opinion piece presents the Obama Administration’s attacks on Koch Industries as part of a broader campaign to stifle business support for conservative candidates.

"Without doubt, the supervisory ratio within the Postal Service is far, far higher than 1:7," said Louis M. Atkins, president of the National Association of Postal Supervisors. Many comments, though acknowledging that the Postal Service has too many layers of management, also questioned Issa's numbers.

I agree with these folks. After looking at USPS employment statistics (see chart at right from the last annual report), I can't find that many supervisory or managerial employees.

Of the approximately 712,000 employees at the end of last year, more than 90% are in categories like carrier and mail handler that seem clearly to be non-supervisory. Adding the "Postmasters/Installation Heads", "Supervisors/Managers", and all headquarters and area-office employees (even though some are non-supervisory) yields abou t 65,000 -- only 1 in 11 USPS employees.

Perhaps Issa excluded non-career employees from his count. But, assuming he recognizes that part-timers and temps are an efficient way to handle fluctuating workloads, that wouldn't make sense. And, besides, that would only change the ratio to about 1 in 10.

Some commenters wondered whether Issa was including 204Bs (substitute supervisors), but they can hardly be called true supervisors.

And one commenter had an insightful response to Issa: "In fairness, the '1 of 7' that Representative Issa refers to also includes low-level Postmasters at thousands of small post offices in small communities throughout the nation. Many of these Postmasters are the only employee in their office, or have just a few clerks or rural carriers. Their salary is less than that of a city letter carrier. Incidentally, many of these same small offices are ones that Congress prevents USPS from closing!"

Other highlights from the comments:

"There are far too many managers. I am a manager and I've seen it from both sides. But it is not so much local management as it is people that don't even see the mail, touch the mail or have been inside a post office WORKING for decades and have no clue what is going on. Some district jobs are an all day cake party,"

"I've been in offices where I was the only one supervising 50+ employees."

Friday, October 15, 2010

Business-to-business magazines have a notoriously difficult time finding interesting and relevant cover images. Mailing Systems Technology rose to the challenge this month, but don’t be surprised if the November cover features a postage meter or some other “safe” subject.

I’ll let Amanda Armendariz, MST’s editor, tell the story, from an email she sent to subscribers this week:

“We were trying to go for something a bit different than the usual charts and graphs that normally grace the cover of survey issues, something that would grab your attention. We appear to have succeeded, although not always in the best way. We've gotten several comments from people who are concerned that the image is glorifying the abuse and battering of women.”

“The woman on our cover is a boxer, not an abused woman. When we selected the photo, we felt that the fact that her hands are wrapped as are any boxer's hands makes it clear that she's engaging in this competitive sport of her own free will."

“Perhaps the same image of a man would have been perceived as a boxer and been more acceptable, but we chose the image because it portrayed a strong woman who demonstrates several things: first, that she can take a punch and keep on fighting (in the ring) just like mail managers have to do in these changing times. Furthermore, we strongly support women who are pioneers in fields that are generally male-dominated, as is the case with women in boxing."

“Our entire staff hopes that everyone is able to take another look at the cover through a different perspective.”

The subject is clearly a boxer, not an abused woman, but it might have been less confusing if she were wearing boxing gloves, headgear, or a mouthguard.

If the Postal Service filed for rate increases after September’s Consumer Price Index is released this Friday, the allowed rate increase would be about 1.1% with the alliance's method versus about 1.7% (Oct. 15 update: 1.685%) with the Sharfman method.

“Maintaining the integrity of this [inflation-index price] structure requires that the price cap reflect periods of deflation as well as inflation,” wrote the broad-based industry alliance, which was formed this year in response to USPS’s unsuccessful request for exigent (emergency) rate increases.

Ignoring years when the Consumer Price Index is lower than in the previous year, as happened in 2009, “would allow the Postal Service to ratchet up its prices over time faster than inflation by refraining from rate adjustments following intervals of deflation,” the filing said. “No reviewing court is likely to find this nonsensical outcome consistent with the plain language” of the law or PRC regulations.

“The difference between the two competing interpretations of the Commission’s rules amounts to approximately $360 million in postage and fees per year,” the mailers alliance wrote. “Moreover, postal price levels inflated by the use of an excessive rate adjustment factor would become the base rates for future price cap adjustments; hence, the original overcharge would recur in perpetuity.”

“Recurring periods of deflation are not unlikely in the current economies of the United States and the world. If the economy alternates between periods of inflation and deflation that leave the CPI roughly flat, selective timing of CPI-based price adjustments could result in postal price increases substantially outpacing inflation over time,” the alliance response said.

The alliance also objected to Sharfman’s “informal advice” because it came only six days after the Postal Service requested guidance on how to interpret the rate-cap regulations. The PRC’s rules require interested parties to have seven days to respond in such cases, and Sharfman’s letter was issued even though PRC staff knew the alliance was preparing a response to USPS's request, the alliance claimed.

Postage rates are likely to increase about 1.7% in January as a result of a letter that the Postal Regulatory Commission's chief lawyer issued today.

When the PRC established its rate-making rules, "little attention was given to the possibility that during periods of deflation, the Postal Service might accrue negative rate authority," PRC General Counsel Stephen L. Sharfman acknowledged in a letter to his counterpart at the U.S. Postal Service. That's why the Postal Service sought Sharfman's advice in how to interpret the law and regulations that limit increases in most postal rates to changes in the Consumer Price Index. (See USPS Seeks Guidance On Its Rate Cap.)

Sharfman's "informal advice," which presumably reflects the commissioners' thinking, basically said that the period of declining prices in late 2008 could be ignored in determining the price cap. The cap is to be based on the difference in the average CPI for the most recent 12 months versus the previous 12 months, he wrote.

The CPI has only increased 0.86% since calendar year 2008, which was the basis for the last round of rate increases. But with Sharfman's method, the rate cap would be 1.477% if USPS requested increases before the September CPI is released on Friday. Then, it seems likely to inch up to about 1.7% and to stay at about that level for at least a couple of months. (Oct. 15 update: With the September CPI, the number is 1.685%.)

Postmaster General Jack Potter promised not to increase postage rates during 2010, but postal officials seem eager to bump up rates once the calendar changes over to 2011. The Postal Service only has to give 45 days' notice before announcing price increases that comply with the rate cap. So it seems likely that USPS will announce increases by mid-November, and perhaps as early as Friday, that take effect in early January.

The price cap applies to the "market-dominant" classes, such as First-Class, Standard, and Periodicals. Individual rates can rise far more than the cap as long as the average for the class doesn't violate the cap.

Increasing rates based on the CPI would not prevent the Postal Service from also filing for another "exigent" (emergency) increase to ease the impact of the recession on its finances. But it would take much longer to get PRC approval for such an increase and then to fight off a likely legal challenge from mailers.

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